When homes are put up for auction due to an owner’s failure to pay property taxes, bidders are not bidding on physical homes, but on tax lien certificates. At a tax lien sale, if you bid on and win the tax certificate for a property one of two things will transpire. One, the owner will redeem his property by paying you, the lien holder, all the back taxes plus interest and fees, or two, the owner will not be able to pay therefore relinquishing his land or home to you as payment for the back taxes. This practice is sound for an investor, but there are a few good tips to consider before getting into the business.
It does sound tempting and even somewhat easy to profit with the purchase of a tax certificate at auction, and if you research the business and implement what you learn, it can be a lucrative business. Before you run to auction and start bidding, find out all you can about the property.
Doing a proper title and bankruptcy search on the property in question is imperative. Even if you provide the winning bid and have in your possession tax lien certificates, creditors, mortgage companies, and the Internal Revenue Service take precedence in a bankruptcy situation. For you, this essentially means, “Get in Line.” You may have the right to the tax lien, but the other involved parties take priority when it comes to payment. This generally will make your certificate worthless.
If the financial background of the property checks out, you should move on to a physical inspection of the home or land. Purchasing sight unseen is a potential risk, and you are highly advised to find and visit your prospective investment. Ask yourself, what amount am I willing to pay for this lien? Will I be able to recoup my investment plus a profit should I gain the real estate and place it on the market? If I cannot sell it due to a poor market, am I willing to use it as a rental investment or does it even have rental potential? Can I build on the land? Can I lease the land to be farmed?
Finding out all the answers may be impossible for an investor to do alone, but one, perhaps co-investor that can help you make an informed decision is a real estate broker. These professionals have access to all kinds of information including abstracts which essentially tell the detailed history of a property in question. Things such as prior flooding issues, land disputes, and information about all previous owners are pertinent in deciding if something is a sound investment. You may be able to obtain this information for free in exchange for using the realtor’s service when and if you must sell, or he or she may be willing to perform the research at cost for the promise of future business propositions.
Keep in mind that inspections, abstracts, and title searches cost money, and neglecting to add these incidentals to your cost/benefit planning could skew your financial results when buying tax lien certificates.